Thursday, May 10, 2012

Imports rose more than exports in March, causing the trade deficit to increase, but that is not necessarily a sign of weakness. The more important thing is that both imports and exports continue to increase at a healthy rate, since that means the U.S. economy is growing and dynamic, and the rest of the world is also growing and dynamic.

This chart focuses on goods exports over a shorter time frame, and here we see how export growth has picked up in recent months after a period of sluggish growth in the latter half of last year. This is especially encouraging, since it suggests that the weakness in the Eurozone has not had a significant impact on demand for U.S. exports. The export sector of the U.S. economy is doing quite well (goods exports are up 57% in the past three years!), in part because of the weak dollar, but also because the rest of the world is growing and consuming more.

This chart illustrates just how much the U.S. trade gap has narrowed over the past decade, thanks mainly to strong export growth. Note also the huge impact that increased international trade has had on the U.S. economy in recent decades. Since 1980, when we imported and exported about 5% of our GDP, trade has roughly tripled in importance: in the first quarter of this year, exports were equal to 13.5% of GDP, while imports were 16.5%. Today, the U.S. economy is far more integrated with the rest of the world than ever before, and there is every reason to think that this trend will continue.

Look how much larger imports are as a fraction of USA GDP. (And exports too).

This suggests the USA economy has globalized since the 1970s. We are much different than 40 years ago.

Our supply side has also globalized. In a sense, we have infinite supply now---it cannot be a problem, as long as cargo vessels can use our ports. There is no way we can outstrip supply, in any practical terms.

It is demand that is our problem. We need way more demand. We can get more demand by selling more offshore---and exports have been booming with a better exchange rate for the dollar.

Generating a lot more domestic demand is a good idea also.

How do you generate inflation when the supply side is global, and the Internet connects everybody to lowest prices? Very hard.

In short, much has changed in the last 40 years---meaning traditional economic ideas have to change too.

A strong dollar and tight money? Doesn't seem to fit the modern reality. Can the USA economy thrive by snuffing out exports? By crimping domestic demand?

Squire: BTW, Sweden is doing the right thing by reducing structural impediments---and also by a central bank that targets nominal GDP growth.

Wish our Fed and Congress was as smart as the Swedes. Look for long-term success in Sweden.